How do we keep Airbus and BMW in the UK?

My buddy challenged me the other day to write a blog about how we could make sure Airbus and BMW don't move production out of the UK. I'll leave to one side the fact that, after one BMW boss had said they were considering moving production, another said they weren't.  And whether, even if what the second one said is correct then what about manufacture of components? After all, tariffs won't be the major issue for things like motor car manufacture, it will be country of origin rules, with all their arcane implications for assembled goods like cars. As I say I'll leave all that to one side for now. But some say an Airbus decision to exit the UK could affect more than 100,000 highly paid British jobs, so that's a big deal.

It's tempting to say that solving Rubik's cube or who created the creator are more tempting - and tractable - problems, though I'm sure that at least one of them would take me until after March 2019. But my initial reaction was that there are two choices. The first is to cut and run by applying for immediate membership of the European Free Trade Association (EFTA), whether intending it to be temporary, until some other solution can be created, or permanent. This would keep us in the single market and would appear to head off, for now, the Airbus-BMW issue. Three EFTA members: Norway, Iceland and Lichtenstein, along with the current EU 28, form the European Economic Area (EEA). These three countries use EFTA's Surveillance Authority for compliance and there is an EFTA Court for dispute resolution. Switzerland operates differently and has a set of bilateral agreements with the EU. It would appear to me that there isn't enough time available to conclude bilateral agreements - after all, that is what we have been trying to do and we are running out of time. So presumably it would have to be Norway style EFTA, not Swiss.

This first option must work, mustn't it? After all, David Owen, my first political hero, was advocating it well over a year ago. But there are some big problems. The "four freedoms" (movement of goods, services, capital and people) apply. And we would have to pay in to the EU budget, while having no influence over it or EU regulations. Apparently Switzerland pays in more per capita than the UK does currently. But we could presumably participate in Euratom (Switzerland does) and the European Defence Agency (Norway does), solving some other yet unresolved issues. And the EEA doesn't cover agriculture and fisheries so we get out of some things, maybe.

My main difficulty with this solution is that it condemns us (because temporary would probably become permanent) to a definitely worse position than we had before the referendum, i.e. in the EU but with our opt-outs. We would have to hope that the EU can resolve the migration issues, which it is singularly failing to do at the moment. And accept that internal EU migration was never the main problem or concern (which, for EU citizens, it wasn't).  But if we feel that our position is inevitably worse than the status quo ante and it's a matter of limiting the damage, isn't this a way forward?

But hold on a moment. EFTA members aren't in the EU customs union, so it's not clear to me that this fully solves the Airbus issue (though it might) but it definitely doesn't solve the Ireland border issue! This is why there are customs borders, even if they are light touch, between the EU and both Switzerland and Norway. So I'm not at all clear that this is a viable solution, let alone an attractive one.

The second option is brinkmanship: to press on and try to get the best deal we can. If we assume that "crashing out" with no deal would cause major short term problems we have to rely on the Europeans blinking. After all, some commentators say German industry is worried about this happening and some of the rump EU's 27 states - but not very influential ones - are pressing Brussels not to let it happen. As I've characterised the eurocrats before as self harming psycopaths, for whom their project is more important than the well being of their people, it's not clear to me that they will blink. This is why I think we probably should have tested that by walking away from the negotiations last year.

There is of course a third option: seek to stay in the EU. But I have rejected that as the implicit question was how we save our industry while still exiting the EU.

 So what is worrying me somewhat is that I'm not sure there is a good answer to this question.

In last week's Sunday Times Tommy Stubbington wrote a column, "We can fix Brexit" saying that Britain's main five business groups, the CBI, British Chamber of Commerce, Institute of Directors, the manufacturers' organisation the EEF (which it's called because it was once the Engineering Employers' Federation) and the FSB (Federation of Small Businesses) were desperately pleading to government for an involvement in the negotiations, saying time is running out and they can fix Brexit. However, reading the column revealed that, while their case for urgency is strong - businesses are starting to implement contingency plans to move activities out of the UK having long since put investment on hold - their ideas on how to make progress sounded pretty thin. The main thrust was Britain has been creative, pragmatism is needed on both sides and now it's the EU's turn. "We have seen major steps to pragmatic compromise on the UK side. This is the time for the EU to respond in kind. The EU has such capability to be creative" said one of the bigwigs. The problem with that is it is just what David Davis has been saying for 9 months now. Why would the EU respond any differently to a bunch of British businessmen?

Indeed, the EU has refused to allow its aviation officials to hold contingency talks with its UK counterparts to keep planes flying if no deal is struck by March. That could, in principle, mean "planes are grounded and wings for half the world's civil aircraft, made by Airbus, could be deemed illegal for use on planes licensed by the EU". (I take this to be hyperbole, surely it would be for planes going into service for the first time, the ones already flying have been licensed. But it would mean Airbus would be laying in to Brussels so that could help).

Stubbington noted that one of the business leaders said that the EU should "seriously consider" May's request for a bespoke deal. But said bigwig also went on to opine "What we are seeking to agree with the EU is a reverse free trade agreement. Nobody on this planet has done that before. Every FTA that has been negotiated has been about getting people to align closer. This is a unique scenario - so we need a unique solution". Great. The EU has said pretty well throughout that it will only offer one of its standard pre-baked options.

For what its worth I think we have to hold our nerve and trust that the Foreign Office and Davis's team have been talking to friendly countries within the rump EU 27  to assess what they will do if the Council of Ministers are presented with no deal. They would have the power to extend the timescales, one way or another. The big problem with brinkmanship is that damage is being done to British business now and it's going to get much worse over the next 8 months. But, of course, that doesn't bother France and Germany an iota; it's what they want, to gain a competitive advantage and, as businessmen are wont to say, steal our lunch.

But the news that a traditional friend of Britain, Mark Rutte the Dutch Prime Minister, responded to Theresa May's plea for close ongoing security co-operation with the EU by saying "Forget cherry-picking, focus on fixing the Irish border" is not encouraging. (Reported yesterday by The Times). 

My definitive answer is that I wouldn't have started from here. I wouldn't have agreed the divorce bill without a firm linkage to a bespoke trade deal. And I definitely wouldn't have agreed the ridiculous Irish border fallback, which the UK side seemed to think was hypothetical at the time, because it wasn't going to happen. This isn't hindsight: I said the day after the joint report on phase 1 of the negotiations was published "So the onus remains entirely on us to bring forward ideas to fix the potentially unfixable. The EU side can just refuse to agree to anything they or the Republic don't like. They don't have to do anything other than say "non" and "This gives the EU side the most enormous lever in future negotiations. I'm sure they won't hesitate to use it." (see Reasons to be Cheerful - or Entangled? 8 December 2017).  And, as all readers know, I would have considered walking out of the negotiations to pitch them into an early crisis, while there was still time to fix it, last autumn. I accept though that this would have been risky and Theresa May's government might not have survived so I probably could have been reluctantly persuaded to agree not to actually flounce out. But more like Trump than Davis? Yes, of course. But it's a bit late for that now.

I've been reading Wolfgang Munchau's Eurointelligence blog with even more interest than normal over the last couple of days. He is an expert on the EU and eurozone so sees things from the EU perspective, but is based at Oxford University, so is fully familiar with the political dynamics in the UK. Munchau has posted prolifically on Brexit recently.

On 26 June he asked Could the Irish border issue trigger a no-deal Brexit? noting that, ahead of Friday's summit, the EU and UK were hardening their positions.

On 27 June, in his column titled  Could no-deal Brexit preparations become a self-fulfilling prophecy? he said "It is normally sensible for both sides in a negotiation to make preparations for a no deal. We also think it is perfectly sensible for negotiating partners to say that no deal is better than a bad deal. If you don't say it, you end up with a bad deal. "  However, he went on to say "The probability of a no-deal Brexit is rising, however. First of all, industry is creating facts on the ground by reducing investment. The more this goes on, the smaller the value of a transitional agreement for the UK. If the negotiations go all the way until the end of the year, with rising expectations of a no-deal Brexit, it is quite possible that the UK government may conclude that the political cost of an agreement is too high and the benefits from a Brexit transition followed by a customs union are too low, given the changed economic situation" and " This is why a decision by the UK to join the EEA, or a customs union with the EU, has a declining economic value the closer it gets to the Brexit deadline. We are now well into the phase where people have to make preparations, and those preparations create irreversible facts." He concluded "We still think a deal is most likely, but accidents can - and probably will - intrude."

On the same day he wrote about why it is so difficult for the EU to agree post-Brexit defence and security co-operation. The UK is France's key military ally (the countries have been much closer than one might have thought for decades) but the UK has been less engaged in Africa since the Libya adventure and, in the limit, Macron will turn to Germany, even though they don't spend two brass farthings on defence and are always suspect on standing up to Russia.

On 28 June Munchau noted that Gibraltar was becoming a first order Brexit issue, talks having broken down over Spain's insistence on joint management of Gibraltar airport. I'm not sure why the Spanish want this but we know they will try anything to get some hold over Gibraltar. This is making people look at various enclaves in the EU, like Andorra and the German and Italian enclaves in Switzerland, Busingen and Campione, as well as the Channel Islands and Isle of Man. Ultimately Munchau thinks that Spain has no interest in exercising its veto because of the interests of the Campo de Gibraltar, the county in Andalusia nearest to Gibraltar. The interest of the region is to keep the border with Gibraltar as open as possible. The closure of the border between 1969 and 1982 seriously hurt both Gibraltar and the Campo, and moreover cemented the Gibraltareans' determination to remain independent from Spain, so nobody on either side wants to see a repeat.  But Munchau warns that Spain will seek to leverage the fact that 96% of Gibraltarians voted to remain in the EU to change the status of Gibraltar. I've long thought that, if it weren't for Mrs May needing the DUP's votes, the northern Irish could get stitched up. Watch out Gibraltar - you don't have any MPs in the Commons!

On the same day Munchau noted that German companies have switched from complacency to panic over Brexit: German companies active in the UK are very advanced in their hard-Brexit preparations. 44% have already shifted their supply chains, while a total of 72% say that they have made intensive preparations. 47% of German companies have postponed planned investment decisions, and one third has stopped investments altogether.  The problem is that, once these decisions are taken, they will not be simply reversed even in the case of a soft Brexit. He doesn't expect to see any breakthrough in the Brexit negotiations and thinks that this will be a knife-edge situation even if all goes to plan. "At that point the full economic damage will be done, and the relative costs of a hard Brexit will be correspondingly lower - since the costs will already have been incurred." This could mean "it might become politically too costly for the UK's government to agree or ratify a withdrawal treaty". He goes on to say "We consider a hard Brexit a real possibility now - not a tail risk."

On 29 June Munchau considered the EU's red lines in the Brexit negotiations. He notes what he calls a "solid analysis" by Jean-Claude Piris, formerly head of the EU Council's legal service. He is saying that the idea of a partial customs union for goods only is not going to happen. Such a solution might be justified for a small territory like Northern Ireland, but cannot be used as a general exception for an entire country. But what really clinches the argument is the UK’s request for single market access, based on voluntarily compliance with EU standards. Piris says: 

"This hope is based on a misunderstanding of what the SM is. A third state cannot get partial access to the SM under the same conditions as EU or EEA states without being bound by the same constraints. This is not because of bad will on the EU’s part. The EU has no choice but to protect its major success, which binds together all its members: the homogeneity, credibility and legal security of its SM. The European Council will be united in refusing to put the SM’s credibility in jeopardy."

So the EU would not be able to accept freedom of movement for goods and capital but not for people. The four freedoms come as a package, something that seems basically incomprehensible to many commentators in the UK. Piris notes that exactly the same arguments would also apply to a more limited agreement relating to goods only. This leaves only a Canada-style trade agreement, with no customs union or single market membership, but with a tariff-free customs arrangement and a joint dispute-settlement procedure. The question is where this will leave Northern Ireland. The implication is that there isn't an answer, without a conventional border. So, unless something gives, Munchau says this explains why close observers of the process are becoming increasingly pessimistic.

Oo-er... However Niall Ferguson, writing in the Sunday Times about the EU's immigration problem on 17 June, said: "I used to be sceptical of the argument that Brexit was like leaving a sinking ship." Ferguson says he is reassessing his view, because events in Europe are moving in directions that seemed inconceivable just a few years ago. He says that European centrists are deeply confused about immigration. "Many, especially on the centre-left, want both open borders and welfare states. But the evidence suggests that it is hard to be Denmark with a multi-cultural society. The lack of social solidarity makes high levels of taxation and redistribution unsustainable". He notes that a respected author, the son of Bangladeshi immigrants to the US, has argued that America must restrict immigration or risk civil war as rising inequality and racial tension combine. Ferguson hopes that America's melting pot can be salvaged, but he has no such hope for Europe. "No-one who has spent time in Germany since Merkel's great gamble of 2015-16 can honestly believe that a melting pot is in the making there. Anyone who visits Italy today can see that the policies of the past decade - austerity plus open borders - have produced a political meltdown. Fusion may still be an option for the United States. For Europe I fear the process is one of fission - a process potentially so explosive that it may relegate Brexit to the footnotes of history".

This is why the recent EU summit was dominated by migration and not Brexit. Politically Merkel is in deep trouble. Having shafted David Cameron and caused his demise over freedom of movement and then probably caused her own downfall by saying "Wilkommen" to all and sundry the only question is whether she will survive long enough for Theresa May's end to come before her own. Migration is the big issue even though numbers are a fraction of what they were 3 years ago. But the Italians have realised they can get traction on this topic. And it is the big long term issue for the EU. Syrian refugees was a short term blip. Nigeria already has a population about three times that of Canada, Australia and New Zealand combined. Roughly a third of these people live in poverty. Real poverty not what people call poverty in Europe. The number of babies born in Nigeria in three weeks comfortably outnumbers the total population of Iceland, who they played in the World Cup. This is why Ferguson says you can't have open borders and welfare states. For once the EU has grasped that there is an issue even if, as usual, they can't decide what to do about it.

Ferguson may or may not be right that the EU is bound to split, though I have always thought that the EU is probably an irrelevance in the long term, with commercial and demographic trends as they are in the world. I still believe, as I always have, that the long term prospects for a fully independent UK are good and quite possibly better than being in the EU. However, that's fine for the youngsters: I could be geriatric or pushing up daisies when this promised land is reached. I always feared that there would be a transitional hit, that the exit negotiations would be a total pain and that the EU would not negotiate on the basis of what was "best for everybody". It's why I decided I was too old to vote Leave, as I thought I would only see the economic pain and not so much of the benefit, and why I resent it so much when younger folk blame the old for the Brexit vote.

So I wouldn't have started from here and I didn't have the stomach to go through all this nonsense. But we voted to Leave and turning back now doesn't make any sense as we would definitely be worse off than when we started. So as I've said before (20 October 2017) I want to leave the EU for medical reasons - I'm sick of them (a reference to an Ozzy Osbourne joke/quote).

Over to you Theresa and David - can you actually make a Brexit without breaking too many eggs (or Airbuses?) Are you going to blink or are you going to take it to the line to see if they do? Do ya feel lucky, punk?

Now, where's that Rubik's cube? At least I know that has a solution!